Investing Billions in New Capacity Painful for Chemical Industry/manufacturers Cautious about Capital Expenditures

Article excerpt

NEW YORK - The Exxon Corp.'s petrochemicals
business is enjoying good times. Profits are rising, demand is
brisk and most of its plants are operating nearly flat out.

In days gone by, Exxon would have almost automatically built a
new plant or two so that impatient customers would not be tempted to
take their orders elsewhere.

No more. Instead of expansion, Exxon is squeezing additional
production from existing facilities through small and inexpensive
steps such as installing pipes with wider diameters, reducing
maintenance downtime and teaching staff to operate high-tech
equipment more efficiently.

Investing billions of dollars in new capacity on the basis of
forecasts of significant growth ``has proven to be a terribly
painful experience'' for the chemical industry, said Kenneth N.
Robertson, a vice president of Exxon Chemical, whose overcapacity
forced it to sell one plant and close another in 1985.

If Exxon is more cautious about capital investment, so are many
other manufacturers. In industries ranging from autos to electric
utilities to appliances, there is a reluctance to build factories or
replace the equipment used in production.

That reluctance, if it persists - and there is strong evidence
that it will - could hobble the economy for years. Capital spending
has been a powerful engine of economic growth in the postwar years,
and the stimulus it can provide is especially needed now. With so
much concern that the other engine, consumer spending, is cooling
off, capital spending or the lack of it could determine whether the
economy continues to grow or slides into recession.

Many economists and business executives are convinced that the
years of robust capital investment are over for a while. ``Long
term, the trend is slowly down, not up,'' said Irwin Kellner, chief
economist at Manufacturers Hanover Bank. Even Paul A. Samuelson, the
Nobel laureate in economics who considers himself an optimist on
capital spending, does not look for a rapid expansion. ``I do not
see a collapse,'' Samuelson said, ``but I don't see a new era
either. In fact, I'm quite surprised that we are doing as well as
we are.''

Capital spending climbed a hefty 17 percent in 1984 and another
9 percent in 1985 as the nation worked its way out of a recession.
That provided a mighty contribution to growth early in the current
recovery.

This spending surge, however, followed a two-year period of
decline. And the recovery was short-lived: Last year, capital
spending fell by 3.1 percent in inflation-adjusted dollars, and the
Commerce Department, in a survey of capital spending plans released
last week, forecast a rise of only 1.8 percent for this year.

While spending is increasing in paper, textiles, and food, some
big guns of capital investment - auto, steel, computer and utility
companies, for example - are shrinking their outlays, and the oil
industry has no plans to increase spending significantly.

Most forecasts see capital spending increasing again in 1988.
After next year, however, it is expected to subside. Neither the
Commerce Department nor such private forecasting services as Wharton
Econometrics and McGraw-Hill's Data Resources Inc. hold out hope
that capital investment will grow at more than a 4 percent average
annual rate before the mid-1990s.

That would keep it just ahead of the expected annual increase in
the gross national product - hardly the stimulant that spending has
been in the past, when it climbed at two or three times the rate of
economic expansion. …